Sunday, February 20, 2011

Misunderstanding supply and demand.

I mean, most people get the idea that when supply is low and demand is high, prices go up; and they get that when demand is low and supply is high, prices go down.

But it isn't that clear cut.

It took me years to realize that a couple of pieces are missing from formulation.

What happens when:

1.) Supply is high and Demand is high?

2.) Supply is low and Demand is low?

I'd have to say, those two equations are the more likely, for the vast majority of product.

So it's a bit more complicated than people think.

First of all, the situation of supply being low and demand high never holds. Supply ALWAYS catches up to demand; unless, I suppose, you're dealing with precious metals or something. But if it can be produced, it will be produced -- and then over-produced.

So the situation I find myself in most often is enough supply; but also low demand.

Here is where I think most people lower prices, which I think is the wrong thing to do. You are only going to have so much interest in any product, but counter-intuitively, when there is little interest, you can usually get the customer to pay full price. Because even though there is a large supply, because of low sales most merchants won't be carrying the product any longer, which creates a de facto lower supply.

On the other hand, NO amount of low prices will increase demand if there is no demand.

So you might as well be rewarded for investing in, gambling on, a product that is in lower demand.

There is also the matter of buying lower quantities, thus usually paying higher prices. So what you want is full price, so you can replace the product; or, conversely, if it doesn't sell, you still have the product in stock.

This is a hard thing to explain. Higher prices creating lower demand on purpose. But it's a bit like having your cake and eating it too. The equation of selling a product 4 or 5 times to get the profit from selling once, but also having the product in stock, makes sense when there is sales volume. But when sales volume drops, you may get stuck with that last purchase without a profit or you may just stop carrying the product.

This is probably what most stores do -- liquidate the product, and get their money back.

But once you decide on having a long-tail sort of store -- or circumstances dictate that you must have a long-tail sort of store -- getting rid of product is counter productive. You want just a little left at the end, so that one person who walks in once a year can find it.

Because it's not all just about the individual sale -- it's about what you carry, and what people perceive you to be carrying, and how you can afford to carry it.

I figured out early on that it's better to have a product at a higher price, then to have lower price but not have the product.

So as demand starts to drop on a product, I'm much more likely to firm up the price -- and go on to the next thing.

Our culture is mostly too much supply, and not enough demand. Not sure how that works out in the long run, except that we'll have full landfills.

About Me

I'm Duncan McGeary, owner and/or operator for the last 33 years of Pegasus Books in Downtown Bend, Oregon. These days I'm writing books as well as selling them.
I'm the comic book guy. But even more so, I'm a book book guy. Books of all kinds. Big books and little books, children's and adult, fiction and non-fiction, hardback and paperback and trade paperback and graphic novels. Books with more words than pictures and books with more pictures than words. They are all part of the book world to me, and I love being surrounded by them every day.
I also have a second blog: Pegasus Books, where I list the product coming in over the next week.